Monthly Archives: October 2020

Changes to Shareholder Proposal Eligibility Rules

Posted by Elizabeth Bieber, Andrea Basham and Jack Liechtung, Freshfields Bruckhaus Deringer LLP, on
Wednesday, October 28, 2020
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Elizabeth Bieber is counsel, Andrea Basham is counsel, and Jack Liechtung is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum.

Going into the 2022 annual meeting season, shareholder proposal eligibility criteria under Rule 14a-8 is going to change. [1] On September 23, 2020, the SEC released final rules amending Rule 14a-8—the culmination of a multi-year process to modernize the rule, which governed unchanged for more than two decades. The SEC initially proposed amendments in November 2019 and the recently released final rules are substantially similar to the 2019 proposal, which, among other amendments, implement a slide scale eligibility test that inversely correlates length of ownership to the required equity stake, limits shareholder proposals to one “person,” and raises the resubmission threshold.

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The Impact of COVID-19 on Shareholder Activism in the Retail Industry

Posted by Keith E. Gottfried, Morgan, Lewis & Bockius LLP, on
Wednesday, October 28, 2020
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Keith E. Gottfried is partner at Morgan, Lewis & Bockius LLP. This post is based on his Morgan Lewis white paper. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

The primary focus of many retailers in the near term will likely be on staying afloat and addressing their liquidity needs, the health and safety of their employees and customers, the overall health of their businesses, and how best to pivot their business models to adapt to shifting consumer preferences and expectations in the wake of the ongoing coronavirus (COVID-19) pandemic. However, as the retail industry has been upended by the pandemic as never before, and taking into consideration that almost all well-known activist investors have a longstanding interest in the retail sector, retailers should also be concerned with how the turmoil caused by the pandemic has made them attractive targets for activist investors. It is also likely that the recent proliferation of special purpose acquisition companies (SPACS), particularly SPACS with an expressed interest in consumer-facing companies or SPACS formed by well-known activist investors with retail industry experience, may be a strong catalyst for increased shareholder activism in the retail industry.

Current Situation

The retail industry is clearly one of the industries most impacted by the ongoing COVID-19 pandemic. Since March 2020, when heightened concerns about the pandemic began to take hold, retailers have had to cope with government-mandated business closures and, later, slow and inconsistent guidance on reopening, as well as the need to implement new social distancing and health and safety protocols. In addition, retailers have had to pivot their business models and reimagine their businesses in ways that allow them to service their customers in a new normal and take into account a new paradigm of not only government-imposed social distancing, but also consumers’ increased wariness for public spaces and crowds, particularly indoors.

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Statement by Chairman Clayton on Regulation Best Interest and Form CRS

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on
Tuesday, October 27, 2020
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Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good afternoon and welcome to the SEC’s Staff Roundtable on Regulation Best Interest and Form CRS. [1] We hope that this event provides useful information to broker-dealers and investment advisers in complying with these key regulatory enhancements. Staff from the Commission’s Division of Trading and Markets, Division of Investment Management and Office of Compliance Inspections and Examinations, together with staff from FINRA, will present some insights and feedback as we approach the four-month anniversary of the June 30 Reg BI and Form CRS compliance date.

The Commission adopted Regulation Best Interest, or Reg BI, and Form CRS to enhance significantly the quality and transparency of relationships between broker-dealers and investment advisers—together, “firms”—and retail investors. Reg BI and Form CRS, together with related interpretations adopted at the same time by the Commission, are designed to bring the legal requirements and mandated disclosures for firms serving retail investors in line with reasonable investor expectations. Collectively, they also are designed to preserve retail investor access—in terms of both choice and cost—to a variety of investment services and products, fostering healthy, transparent competition.

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Short-Termism, Shareholder Payouts, and Investment in the EU

Posted by Jesse Fried (Harvard Law School) and Charles C. Y. Wang (Harvard Business School), on
Tuesday, October 27, 2020
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Jesse Fried is the Dane Professor of Law at Harvard Law School and Charles C.Y. Wang is the Glenn and Mary Jane Creamer Associate Professor of Business Administration at Harvard Business School. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (discussed on the Forum here); and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).

In both the US and the EU, commentators and policymakers have expressed concern that shareholder-driven “short-termism” (or “quarterly capitalism”) has become a critical problem for public firms and the economy. Frequently, the main evidence offered for short-termism is cash payouts to shareholders, through share repurchases and dividends, that are large relative to firms’ net income. The leading exponent of this view is William Lazonick, who has argued that high ratios of shareholder payouts to net income impair firms’ ability to invest, innovate, and provide good wages.

The high ratio of shareholder payouts to net income has been cited by corporate lawyers such as Marty Lipton and asset managers such as BlackRock’s CEO Larry Fink as evidence that market pressures deprive firms of the capital needed for long-term investment. Lazonick’s payout-ratio figures for the US have been cited by Joe Biden as evidence of short-termism, and by Senator Elizabeth Warren as justification for her 2018 Accountable Capitalism Act.

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NYSE Extends Waiver of “Related Party” and “20%” Stockholder Approval Rules

Posted by Eleazer Klein, Adriana Schwartz, and Clara Zylberg, Schulte Roth & Zabel LLP, on
Tuesday, October 27, 2020
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Eleazer Klein is partner and Adriana Schwartz and Clara Zylberg are special counsel at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.

Recognizing that companies need quick access to capital due to the unprecedented disruption caused by COVID-19 and to mitigate against the NYSE stockholder approval rules presenting a hurdle to raising capital, the NYSE and the SEC approved the temporary waiver (“NYSE Waiver”) of certain NYSE stockholder approval rules set forth in Section 312.03 of the NYSE Listed Company Manual (“NYSE Manual”). The NYSE Waiver was last set to expire on Sept. 30, 2020, but, effective Sept. 28, 2020, has been extended through Dec. 31, 2020. [1] The relevant NYSE rules require a listed company to obtain stockholder approval before it issues 1% (or, in certain circumstances, 5%) of its outstanding shares of common stock or voting power pre-issuance to certain Related Parties [2] and before issuing in excess of 20% of its outstanding shares of common stock or voting power pre-issuance at a discount to the “NYSE Minimum Price.” [3]

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From Shareholder Primacy to Stakeholder Capitalism

Posted by Frederick Alexander, The Shareholder Commons; Holly Ensign-Barstow, B Lab; and Lenore Palladino, University of Massachusetts, on
Monday, October 26, 2020
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Frederick Alexander is Founder of The Shareholder Commons; Holly Ensign-Barstow is Director of Stakeholder Governance & Policy at B Lab; and Lenore Palladino is Assistant Professor at the School of Public Policy and the Department of Economics at the University of Massachusetts Amherst. This post is based on a recent paper authored by Mr. Alexander, Ms. Ensign-Barstow, Ms. Palladino, and Andrew Kassoy. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Capital Market Policies for the 21st Century

The U.S. capital markets have failed to create an inclusive and equitable economy or durable prosperity because they are built atop policies formulated over the last 150 years. These policies fail to account for (1) the injustice that naturally accrues in an unregulated free market (e.g., the lottery of birth), and (2) the planetary boundaries we are now approaching. This post proposes new legislative and regulatory reforms that promote capital stewardship to preserve market mechanisms in a more equitable economic system designed to create justice and ecological balance.

The policies we propose will create a foundation for U.S. markets that channel resources toward durable productivity and equity for workers. With these policies in place, investors will have the tools to create sustainability guardrails for company behavior that will distinguish between efficient, innovative profits that benefit us all and profits derived from negative-sum behaviors that put critical systems at risk and continue to exploit communities.

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The Economics of Soft Dollars: A Review of the Literature and New Evidence from the Implementation of MiFID II

Posted by Howell Jackson (Harvard Law School) and Jeffery Zhang (Board of Governors of the Federal Reserve System), on
Monday, October 26, 2020
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Howell E. Jackson is the James S. Reid, Jr., Professor of Law at Harvard Law School and Jeffery Zhang is an Attorney in the Federal Reserve’s Legal Division. This post is based on their recent paper. The views expressed in this post are those of the authors and do not necessarily reflect those of the Federal Reserve or the United States government.

For nearly half a century, the bundling of research services into commissions that paid for the execution of securities trades has been the focus of both policy discussion and academic debate. The practice whereby asset management firms make use of investor funds to cover the costs of research, known as “soft dollar” payments in the United States, resembles a form of kickback or self-dealing in that the payments allow asset managers to use investor funds to subsidize the cost of the asset managers’ own research expenses. On the other hand, the production of information on the value of securities arguably promotes the development of capital markets and might be understood as a public good, benefiting both investors and the economy more generally. These competing perspectives on bundled commissions have, over the decades, produced a standoff between investor advocates in favor of unbundling and financial industry interests committed to retaining a familiar, albeit opaque, business practice.

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Statement by Commissioners Lee and Crenshaw on No-Action Relief for Non-Compliance with the Customer Protection Rule

Posted by Allison Herren Lee and Caroline A. Crenshaw, U.S. Securities and Exchange Commission, on
Monday, October 26, 2020
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Allison Herren Lee and Caroline Crenshaw are Commissioners at the U.S. Securities and Exchange Commission. This post is based on their recent public statement. The views expressed in the post are those of Commissioner Lee and Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Last night [October 22, 2020], a no-action letter was issued relating to apparent non-compliance by certain broker-dealers with Rule 15c3-3, [1] which is aptly named the “Customer Protection Rule.” [2] In short, certain broker-dealers’ failure to comply with the Customer Protection Rule puts retail customer funds and securities at risk, and the no-action letter purports to allow this misconduct to continue for up to six additional months. [3] The letter clearly states that these practices are not consistent with the requirements of the Customer Protection Rule. On that point we agree, and it is critical that registrants heed that message.

No-action relief, however, is not the appropriate method to communicate the message in these circumstances. No-action relief is a mechanism that allows registrants to obtain certain assurances when their conduct may touch upon a gray area of regulation, or even may be technically proscribed, but does not raise the policy concerns underlying a particular rule. It is designed to give market participants comfort in continuing a particular course of conduct in areas where clarity is lacking, or participants face potentially conflicting requirements. [4] It should not provide a grace period for compliance with clear violations of law—especially violations that put investor funds directly at risk. Here, the potential harm to customers arising from the conduct goes to the very heart of the Customer Protection Rule and should be remediated without delay. READ MORE »

Shareholder Value and Social Responsibility Are Not At Odds

Posted by The Honorable Mary K. Bush, Bush International LLC, on
Sunday, October 25, 2020
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The Honorable Mary K. Bush is President of Bush International LLC. This post is based on her recent article, originally published in ProMarket. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here);  For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

The core of capitalism—the freedom to engage in entrepreneurial activities, to trade goods and services, and make profits for shareholders—in and of itself, is socially responsible. It is so because enterprises and the profits they generate bring many benefits to society including jobs and training, revenues for suppliers, R&D investment for innovation, among others. All potentially produce social and economic returns for individuals and businesses beyond the walls of the company. That is socially responsible.

With renewed emphasis on social responsibility, some see Milton Friedman’s dedication to increasing profits for shareholders as being at odds with social responsibility. I don’t see it that way at all. I think that friction between profits for shareholders and social responsibility arises, in many cases, when individual freedom is, in some way, compromised. Capitalism and individual freedom are joined at the hip. Friedman saw it that way and so do I. A weakened or severed link between the two frequently causes the friction.

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Time to Unlock the Hidden Value in Your Board

Posted by Jeffrey R. Greene, Fortuna Advisors LLC, and Sharath Sharma, EY, on
Sunday, October 25, 2020
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Jeffrey Greene is a senior advisor at Fortuna Advisors and Sharath Sharma is the EY Americas leader for strategic transformations. This post is based on two articles they recently published in Corporate Board Member.

Management teams do not have to confront the pandemic’s daunting challenges alone. As they move from stabilizing cash flow and reengineering workplaces to creating a little breathing room—both financially and mentally—CEOs and directors should reflect on how to deploy their boards most effectively.

Regardless of where company performance lies on the spectrum—from distressed (physical retailers) to thriving (video conference software)—leaders can improve outcomes by:

  • Systematically involving directors in critical decisions on strategy, culture, building resilience, investor communications and compensation
  • Efficiently facilitating directors’ education about the company and its markets
  • Fully utilizing the board’s collective experience, diverse perspectives, real-time insights and extended networks

Management and shareholders cannot afford to underutilize the board in addressing this crisis, for which there are no playbooks, or its aftermath, which is unlikely to resemble any past recoveries.

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